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Saturday, September 7, 2013

Do Technical Indicators Still Work?

“Trading rarely takes as much time as you think it will
when you get started. Once you've nailed the concepts, the actual time it takes
to trade is actually measured in minutes, rather than hours.”- Louise Bedford

This topic is now a bone of contention among traders. Some
say that indicators only confirm what the price is doing and nothing more. Some
say that lagging indicators (indicators that give signals after the market bias
has been confirmed) can make one miss out on many trading opportunities. Some
say that leading indicators (indicators that signal next price movements before
they actually happen) can lead to bogus signals. Just as we have experiences
that can help our trading career, we can also have experiences that can cause
us to temporarily doubt the validity of this career.

Some negative thoughts trouble the trader’s mind regarding
their ability to reach the level of permanent competence. The thoughts seek to
convince the trader that she/he cannot be a good trader. The thoughts often
come when we are facing losses, crises and vulnerability in our trading career;
or when we are staggering under the weight of failures and disappointments in
trading.

The truth is that, whether you use indicators or not, no trading
methodology is perfect. Do you trade purely on price action? Do you use a
highly sophisticated robot in trading? Do you use chart patterns? Or do you use
some exotic method brought to you by an alien from another planet? I can tell
you that the method is not perfect, as the indicators you berate are not
perfect either. This reminds us that uncertainty and losses happen to market
wizards as well. For inevitable drawdowns, some think that what once was normal
may not be normal again. If you want to use any trading methodology whatsoever,
you should remember that we tend to be flawless in our trading results (for we
are an instant gratification culture). This kind of mindset does not pay in
trading, for it would be like dwelling in a fool’s paradise, and that would not
improve our real trading experiences.

Technical indicators still work and they will continue to
work, though their uses ought to be coupled with stringent position sizing and
conservative risk control, just like any other trading methodologies championed
by haters of technical indicators. All such experiences illustrate that making
changes that can safeguard our portfolios is possible; and doing so always
brings benefits. Market speculators cannot talk about the future with utmost
certainty, and would simply buy or sell whenever their strategies signify so.
Those who follow the line of the least resistance would open long orders in an
uptrend with the hope that the price could go more northwards, or they may open
short orders with the hope that the price might go more southwards.

The article is ended by the quote below:

“Interestingly,
beginning traders, as well as many experienced traders we have met, exhibit a
strong tendency to believe that all of their short-term objectives must immediately
be met. But in the long-run, it is actually better to hold a long-term
perspective.”– Joe Ross (Source: Trade2win.com)